POST-RETIREMENT MEDICAL AID FUNDING

1. POST-RETIREMENT MEDICAL AID FUNDING SAMANTHA DAVIDSON Labour Law & Sustainability Department 35 Aliwal Street Durban 4000 Tel: 302 0376 Fax: 302 0822 PENSION LAWYERS ASSOCIATION January 2006

2. INTRODUCTION - HISTORY • In past it was common practice for employers to offer continued funding of medical aid premiums to its employees after their retirement • Then became generally accepted audit practice to reflect the present value of future obligations in a company’s financial statements • And medical aid inflation spiraled • So many employers endeavour to reduce / eliminate this liability

3. SABC v COOP AND OTHERS • 30/11/2005 - Supreme Court of Appeal confirmed High Court order that SABC must continue paying 60% of retirees’ medical aid contributions • Some Relevant Facts: • SABC audited financial statements reflect payment of post-retirement subsidy as long term liability • Unilateral withdrawal of subsidy in 2001 • Dispute in SCA turned on whether retiree status validly conferred on Coop and others – ostensible authority proved

4. ERASMUS AND OTHERS v SENWES LTD AND OTHERS • Urgent application brought in February 2005 by 400 pensioners • High Court interdicted employer from reducing medical aid subsidies and transferring pensioners to a lesser medical aid plan, pending outcome of trial • Issues: • Whether Senwes contractually obliged to pay subsidy towards pensioners’ medical aid premiums? • Whether employer ever entitled to reduce / withdraw subsidy unilaterally?

5. ERASMUS AND OTHERS v SENWES LTD AND OTHERS cont. • Whether Senwes contractually obliged to subsidise medical aid for pensioners? • Facts: • “personnel regulations” outline employment contract and provide for pensioners continued membership of the medical aid scheme and for defined category (incl. Erasmus and others) “sal Senwes die volle premie gebaseer op die ‘Supreme’ opsie betaal” • On retirement, letter to Erasmus and others stated Senwes would continue to pay subsidy • Senwes had always paid the subsidy in the past (even when suffering financial losses) • Senwes reflected obligation to pensioners as liability in financial statements • Held: prima facie contractual obligation

6. ERASMUS AND OTHERS v SENWES LTD AND OTHERS cont. • Whether employer ever entitled to reduce / withdraw subsidy unilaterally? • Employment contract stated that its terms and conditions could be varied by the board of directors and management without the consent of employees and without notice to them • Legal principle that contract is void if performance in terms of contract entirely dependant on will of promisor NOT applicable to right to unilaterally amend contract • Held: Can amend unilaterally, provided discretion fettered by standard of reasonableness

7. ERASMUS AND OTHERS v SENWES LTD AND OTHERS cont. • Whether Senwes entitled to reduce subsidy unilaterally? • 66% reduction: • not prompted by any change in the medical scheme market (e.g. discontinuation suitable plans) • not necessitated by financial need of Senwes (although probably motivated by desire to increase profitability) • prejudices Erasmus and others (pensioners) substantially • Held: unreasonable = breach contract

8. ERASMUS AND OTHERS v SENWES LTD AND OTHERS cont. • Held: • “ In the context of a right to amend contractual terms, the reasonable exercise of discretion must take into account the rights and interests of both (or all) parties to the contract. It must balance those rights and interests, always bearing in mind the nature and content of the original contractual obligation.” • Equally applicable to pension fund trustees when amending rules?

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